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Office Depot CEO: ‘We Are On The Right Path’ As Retailer Reports Sales Boost From Services, CompuCom

Office Depot's 2017 acquisition of CompuCom has driven a big transformation of the company from a focus on retail product sales to becoming a major B2B IT solution provider with a fast-growing services focus.

Office Depot, best known for its retail office supply business, has shown via its fiscal fourth quarter and full year financials that it has transformed itself into a business-to-business sales and service powerhouse.

Office Depot on Wednesday said that 60 percent of its revenue came from its B2B operations in its fiscal fourth quarter, which ended Dec. 29, compared to 40 percent from its retail business. About 16 percent of its total revenue came from services in the quarter.

That compared to 49 percent of revenue coming from B2B and about 8 percent of revenue coming from services in the first fiscal quarter of 2017.

Office Depot CEO Gerry Smith, in his prepared comments during the company's Wednesday quarterly financial analyst call, said that the company in 2017 embarked on a multi-year strategy to generate growth and a strong cash flow and build the capabilities to drive long-term profitable growth.

"Our accomplishments in 2018 clearly show that we are on the right path," Smith said. "For the year, we grew our business, recapturing top line sales growth driven by the CompuCom acquisition, strong results in our BSD division, and improving trends in retail. We grew our high margin services business, delivering double digits sales increases across our BSD (Business Solutions Division) and retail segments, in addition to the benefits from the CompuCom acquisition."

Office Depot product sales in the full fiscal year 2018 were flat year-over-year at $9.322 billion compared to last year's $9.320 billion. However, its services revenue for fiscal 2018 rose 84 percent to reach $1.693 billion compared to last year's $920 million.

That services growth came not only from CompuCom, Smith said.

"While much of the [services] increase came from the CompuCom acquisition, it is important to note that services revenue across BSD and Retail divisions combined grew 13 percent over last year," he said.

Smith said he joined Office Depot in early 2017 when the majority of its business came from the retail business, but has since invested in growing its B2B and services businesses.

"During that time, we successfully diversified our business so that our B2B business, which is our BSD and CompuCom businesses, is now the largest portion of our revenue. .... We are also finding that our customer base in the BSD and CompuCom divisions are very similar, which is leading to an increasing pipeline of cross-selling opportunities," he said. "Together, these two businesses represent approximately 60 percent of total sales, and we see this continue to grow in the coming years. When you add the percentage of business customers utilizing our retail stores, we estimate businesses represent more than 70 percent of our total revenue."

Smith also said that average gross margins in Office Depot's service offerings are about 1,000 basis points higher than those of its product margins. The company in 2018 also saw growth in its subscriptions business, and in 2018 broke the one-million subscription mark, he said.

2018 also saw Office Depot scale its tech services to be more relevant to the SMB market, including the launching of device managed services and IT-as-a-service, Smith said.

"We make great progress throughout the year integrating CompuCom offerings into our broader set portfolio, allowing us to grow our services business and to attract new business orientated customers and valuable distribution partners," he said.

Even so, Smith said, operating results for the CompuCom business was disappointing, and the company has taken steps to improve it.

"These actions include a complete realignment of the CompuCom operating structure and improvements in the service delivery process to better align and meet customer needs," he said. "We've also brought in a new highly experienced sales leader, and realigned and re-incentivize our entire sales organization. We are also increasing the use of technology and automation in our processes. The actions have shown signs of success in the quarter, and we expect year-over-year improvements in the future."

During the question and answer portion of the conference call, when an analyst asked about which services seem to be resonating across the company's divisions, Smith replied that the company is seeing continued copy and print services strength, as well as in subscriptions.

"We're seeing some strength in some of our emerging technology offerings," he said. "So we're relatively pleased with the breadth of services we're now offering and that all are starting to take traction. High expectations that they'll continue to grow. … I think if you look at the core area of copy and print, tech services, they are cross-selling with CompuCom, and all those are core fundamental services that [will] continue to grow at an aggressive pace."

For its fourth fiscal quarter of 2018, Office Depot reported total revenue of $2.760 billion, up 3.4 percent over fourth fiscal quarter 2017 sales of $2.581 billion. That figure includes CompuCom revenue for the year of $1.086 billion, up 1 percent from last year's $1.080 billion.

The company reported a GAAP net loss of $14 million, or 2 cents per share, compared to a loss of $48 million, or 9 cents per share, in the same quarter of 2017.

On a non-GAAP basis, the company reported net income of $52 million, or 9 cents per share, up from last year's net income of $45 million, or 8 cents per share.

For all of fiscal 2018, Office Depot reported revenue of $11.015 billion, up year-over-year from fiscal year 2017's revenue of $10.240 billion.

GAAP net income for the year was reported at $99 million, or 18 cents per share, down year-over-year from $146 million, or 27 cents per share.

On a non-GAAP basis, income for the year was $199 million, or 35 cents per share, down from last year's $241 million, or 45 cents per share.

Office Depot also reconfirmed its previous fiscal year 2019 guidance of sales of about $11.1 billion.